Hedge funds build record US natural gas shorts on mild winter forecasts

Hedge funds have reached their largest short position in US natural gas futures on record, anticipating a mild northern hemisphere winter will reduce heating demand and further depress prices, according to Bloomberg. The seven benchmark Henry Hub contracts saw short-only positions surge to 599,731, the highest since Commodity Futures Trading Commission records started in May 2013.

Net short positions reached 192,728 contracts, their most bearish level in over six years, while bullish bets hit a two-year low. This positioning shift comes after a steep 15% decline in US natural gas futures in a single week, their biggest weekly drop since February. Warmer-than-expected early winter weather prompted the drop, with the Commodity Weather Group forecasting October and November to be the third-warmest comparable period in records since 1950.

This supports expectations that a strong El Niño weather pattern will curb demand for natural gas used in heating and electricity. However, the heavy concentration of bearish positions raises the risk of a short squeeze if temperatures unexpectedly drop. An unexpected cold snap could raise heating demand and hinder production, forcing hedge funds to cover positions and possibly hasten a price rebound.

This mirrors a scenario that occurred in late January when a winter storm sparked a sharp rally in natural gas prices. Money managers pared their short-only positions by over 53,000 contracts in a single week, the largest weekly decline in over a year. The latest positioning leaves hedge funds highly vulnerable to shifts in winter weather forecasts, with any shift back towards colder conditions potentially sparking hefty short covering.